Why Americans Keep Spending Despite High Prices: The Wealth Gap’s Impact on Consumer Behavior
Despite rising prices at retail stores and restaurants, Americans have continued to spend at an impressive rate. A key factor behind this resilience in consumer spending is the influence of wealthier households, whose significant gains in income, home equity, and stock market wealth have driven their ability to keep spending.
The Wealthier Consumers’ Impact
Research from the Federal Reserve shows that affluent consumers, bolstered by substantial financial gains, are leading much of the growth in U.S. consumer spending. This trend marks a shift from the pre-pandemic era, signaling that consumer spending— the primary driver of economic growth— could maintain a healthy pace well into the next year.
While wealthier Americans enjoy stronger financial conditions, lower-income consumers have been disproportionately affected by the rising costs of essentials such as rent and groceries. Many have had to scale back on discretionary purchases like electronics, entertainment, and dining out. Although inflation-adjusted incomes are rising, it may take years for lower-income households to fully recover financially.
A Divided Economic Landscape
The disparity between wealthier and lower-income consumers reveals the contrast between positive economic data and pessimistic consumer sentiment. This divide is particularly relevant as the U.S. presidential race intensifies, with only a portion of the population driving the majority of economic growth. Economic disparities, often highlighted in political debates, underscore the critical role wealth plays in shaping consumer behavior.
Despite these challenges, the U.S. economy continues to grow. High interest rates, imposed by the Federal Reserve, have not slowed inflation-adjusted consumer spending, which rose by 3% in 2022 and 2.5% in 2023. In the second quarter of this year, consumer spending grew at a 2.8% annual rate, further demonstrating economic resilience.
Retail Sales Stay Strong
Recent data from the Commerce Department indicate that retail sales in the U.S. rose by 0.4% from August to September, signaling continued consumer confidence. Restaurant sales increased by 1%, reflecting that many Americans feel secure enough to dine out. The Federal Reserve Bank of Atlanta estimates that the economy grew by 3.4% in the third quarter, driven largely by strong consumer demand.
Higher-income households have been supported by a thriving housing market and stock market gains. Home prices continue to rise due to high demand and limited supply, while the S&P 500 has surged by over 22.5% this year. The wealthiest 10% of U.S. households hold about 80% of the stock market’s value, allowing them to maintain their financial strength and continue spending.
A Growing Wealth Divide
The housing and stock market booms have primarily benefited the top 10% of earners. Federal Reserve data show that home equity for this group surged by 70% from early 2020 to mid-2024, reaching $17.6 trillion. Their stock market and mutual fund wealth also soared by 86%, totaling just under $37 trillion. While inflation has reduced some of these gains, the increases remain significant.
This wealth surge has allowed affluent Americans to reduce savings and boost their spending. A Federal Reserve report found that before the pandemic, retail spending increased at similar rates across income groups. However, since 2020, upper- and middle-income consumers have outpaced lower-income households in spending growth.
The Struggles of Lower-Income Consumers
While wealthier consumers continue to drive spending, lower-income households have had to cut back on discretionary purchases. For the lowest-income Americans, defined as those earning less than $28,000, discretionary spending fell by 2.5 percentage points by mid-2024 compared to 2019. Meanwhile, the wealthiest households increased their share of spending on non-essential items during the same period.
The financial struggles of lower-income Americans have also contributed to a rise in credit card and auto loan delinquencies, now at their highest levels in a decade. Despite these challenges, economists like Karen Dynan from Harvard University believe that the broader economy remains stable and resilient, with potential for recovery.
Optimism for the Future
Despite the disparities in spending patterns, experts remain optimistic about the future. As inflation-adjusted incomes rise and the impacts of inflation and high interest rates diminish, analysts expect consumer spending to continue supporting economic growth.
“We’re past the worst,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “The outlook for spending looks strong, and we’re likely to see continued growth in the coming months.”
As the economy progresses, wealthier households will continue to play a critical role in driving spending and sustaining growth. Their financial stability and spending habits are crucial to the overall economic landscape, even as lower-income households work toward recovery.